Navigating the administration of a life estate trust with real property can be a complex task. In this episode of Absolute Trust Talk, Kirsten Howe is joined by Karen Fisher and Kathy Rodriguez of Bishop Fiduciary Services to delve into the intricacies of life estates involving real estate. They cover the unexpected responsibilities of a trustee, strategies for properly dividing assets, and essential tips to set up your trust for success if you own property. Whether you’re crafting your estate plan, managing one for someone else, or potentially inheriting one, this episode is packed with valuable insights you won’t want to miss.
Time-stamped Show Notes:
0:00 Introduction
2:36 Being a trustee comes with a wide range of responsibilities. One important aspect is to examine the terms of the trust to determine what the life estate beneficiary and trustee are responsible for. It’s also very important to consider liquidity.
7:58 What if a beneficiary wants a portion of the trust to go toward their inheritance? Short answer: Trust the trust.
10:30 Many questions and concerns about the property can be eliminated by one action: Getting an appraisal.
11:30 Interested in the appraisal process? Tune in now as Karen and Kathy break it down for us.
16:45 We asked our guests what they wished their client’s trust included. Here’s what our experts had to say about trust inclusions.
17:52 Karen’s time- and money-saving advice: Don’t wait to downsize.
19:00 Thank you to our amazing guests, Kathy and Karen, for sharing such great insights with us!
Transcript:
Hello and welcome to Absolute Trust Talk. This is our podcast at Absolute Trust Counsel. I’m Kirsten Howe, and I have a couple of very special guests here. I’m very much looking forward to this conversation. This is part two of a conversation we’re having about the administration of an estate or a trust when real property is involved. We talked with my guests here about some of the things trustees need to know and probably don’t know what you need to do when you are responsible for real estate. Today, we’re going to talk a little bit more about that, focusing on a few of the scenarios we often see in a trust administration.
My guests today are Karen Fisher and Kathy Rodriguez, both with Bishop Fiduciary Services. Karen is the founder and owner of Bishop Fiduciary Services, which she established in 2013. She provides a comprehensive suite of services that is much more than what corporate trustees generally can do. Many clients need additional services besides just the straight fiduciary services to continue living independently, and Karen’s able to offer that in her firm.
Before she established Bishop Fiduciary Services, she worked for a long time in the trust and estate services world at various large institutions: Citibank, Bank of the West, and Mechanics Bank. That’s where she was working when I met her. She has a very wide range of client experiences in the trust and estates world, from special needs clients all the way up to high-net-worth and ultra-high-net-worth clients. She can do it all.
Kathy Rodriguez, who’s also with Bishop Fiduciary Services and a licensed professional fiduciary, serves as co-trustee with Karen on many of their cases. She is responsible for keeping them on schedule with all their court accountings to make sure they hit all their deadlines. She has extensive experience in the mortgage industry and also has a Juris Doctorate degree, which is what we call a law degree, from John F. Kennedy University. While she was a student there, she worked in their elder law clinic, helping seniors with their estate planning. So, lots of relevant experience.
Karen and Kathy, welcome, and thank you for being here.
Thank you for having us.
I should have said thank you again. This is our second episode together.
Let’s focus on a few different scenarios involving real estate that’s held in a trust, and now you two are the trustees. I want to ask you first about this concept—I’m going to use quotation marks, too—of a “life estate.” This means that somebody gets to use the real estate for their life or for some period of time, or as long as they want to live there, and then it’s going to go to some remainder beneficiary.
Of course, we still have all of the concerns that we would have in any real estate situation, like: Is there insurance? Is it safe? All of those things. What else are you two concerned about in that situation where you’ve got to maintain a property for someone’s benefit for a long time, possibly?
Good question. One of the first things that we’re going to look at is, well, first of all, we want to look at the terms of the trust to see what the life estate beneficiary is responsible for and what the trustee is responsible for. If the trustee is responsible for property taxes, insurance, and maintenance, one of the first things we will look at is the other assets, the liquid assets in the trust. Are there going to be sufficient assets for the life of the trust or really for the life of the life estate beneficiary? There’s no real scientific formula because we don’t know how long someone will live.
However, if you’re starting with quite a bit of money and investing it, I am confident that there would be plenty of funds, but still, you have to be mindful of liquid assets. I have been in a situation where I’ve been asked to take over a trust where there was a life estate beneficiary but very little liquidity. Then, you have to look at the beneficiary living in the home. What are their assets? Are they willing and able to maintain the property? Are they going to be using it just for themselves? What are their plans? Because it’s possible they might think that they can move people in or rent it out. So those are the things we’re going to look at.
So yeah, you have to make sure that, financially, the arrangement you’ve been given is going to work. And if it’s not going to work, I mean, you have to do some kind of analysis, maybe a back-of-the-envelope analysis. Do we have enough money, given our best guess for how long this has to last? If you don’t think so, then you’ve got to get creative, or you have to decline, I suppose.
Correct. There is a case that we’re working on now. One of the things that people might need to think about is when the grantor died there was a low tax basis, property tax. Now the home gets reassessed and the property tax has tripled. We did the back-of-the-envelope, looking at what the taxes are and insurance and some figures – it was a newer home, and it had been well-maintained new appliances, so I wasn’t worried too much about that – but I took a theoretical number that I thought it might cost yearly and I added that all together and said okay we’ve got maybe 10, 15 years.
Then, be honest with the beneficiary and talk to them about what the trust can and can’t do. In one particular case that we’re working on, we told the trust life estate beneficiary that when we get down to a certain amount, we’re going to need to sell the home, and you’re going to need to live somewhere else. We’ll support you in that new place, but the home is not going to be available anymore. But we wanted to give them plenty of time. We gave them several years advance notice because we didn’t want them to all of a sudden realize we’re down to $25,000, and now it’s time to leave.
The person’s older, in their eighties and nineties, and they want that to be their forever home. That does happen, and we are currently working on a case where that has happened.
That conversation is so important because we need to make the beneficiary aware of all of that from the very beginning. And then, just going back to the first point that Karen stated, we look at the trust to see what the trust says and who’s responsible for what expenses.
When somebody is preparing their estate plan, and they’re planning something like that, like a life estate for a beneficiary to remain in the property. It’s very important for them to be very clear in their trust document who’s going to be responsible for those expenses.
Right. And I suppose the earlier you have the conversation with the beneficiary, the more likely they are to consider some alternative to, “I’m going to live in this really expensive house until we’re almost out of cash, and then we’ll sell it.” You know, maybe we should sell it now and then buy something more reasonable, or I can rent.
Anyway, all of that depends on what the trust allows, so that’s always the starting point. Read the document. That is our mandate.
What about the situation where you’re administering a trust, there’s a piece of real estate and one of the beneficiaries – and there are multiple beneficiaries – one of the beneficiaries wants that property as part of their inheritance? What kind of process do you go through in that situation?
Well, first, again, we’re going to look at the trust document. Was there anything stated in there specifically about that? If the trust didn’t say anything about that and one of the beneficiaries shows interest in that property, well, we’re going to have to also take a look at what other assets are available because, you know, one of our duties is to make sure all the distributions from the trust that it’s equitable between all the beneficiaries. We must discuss with the beneficiaries you know and see how others feel about one beneficiary getting the property. And then the other ones, we have to somehow see if that particular beneficiary who’s interested in it, can they get a loan on the property themselves or purchase it in a sense so that they can go ahead. We can pay the other beneficiaries an equitable share?
Did you have any other comments about that?
No, I think that really does put it all in perspective. If there’s a large estate and someone can have the house, and then everybody, the other beneficiaries, is made whole with other assets, that’s great.
But there is one thing that I am always cognizant of, and not everybody thinks about this: What about assets that are growing? Versus like if you want to give assets to one beneficiary, a different alternative set of assets to a beneficiary and one is going to get the house, are these assets going to grow in such a way that every – you know you can’t be perfect in that analysis but you wouldn’t want to give somebody land – and then everybody else, then somebody else gets the Schwab account, and then someone else gets the house.
Now, that might be a little drastic, but I wanted to show that as an example of how that may look fair on paper because it’s all worth the same. But land is not going to grow the same way as a home, an investment property that’s income-producing, or a Schwab account that might be earning quite a bit a month a year.
Right. These are issues that you have to expose to all the beneficiaries before they all agree to that, you know, very unusual distribution. Right. Yes, it’s equal in value today. Are you going to be okay with the fact that 20 years down the road will not be equal in value?
Another question sort of related to this is, when you come to an agreement among the beneficiaries and yourselves that this beneficiary can have the house, you’ve got to assign a value to it. How do you how do you come up with that value?
Well, initially, the first thing we’re going to do at the start of the administration is get an appraisal. We’re going to find out the property’s value at the time the client passed away. And then, if one of the beneficiaries shows interest in the property and we have to have that conversation with all the beneficiaries, that’s one scenario. But even if we were going to sell the property, we’re going to do a current market analysis. What is the value of the property now? We’ll work with the realtor to get that market analysis to determine what the value of the property is.
That’s great. That was what I was getting at.
Let’s talk about now when, let’s say, the very common scenario is that the parent has died, and now the children are the beneficiaries. It’s the parent’s home. The parent was living in this home, and you now also have the wonderful responsibility of dealing with the contents of the home.
Do you have a system or recommendations for dealing with the contents of the home? In this case, let’s just assume the trust is silent. All it says is that everything is equal to my three children.
Yes. Like any other asset, we will want to get an appraisal. We can go into a home, do a walkthrough, and get an idea. If there is extraordinary value that we really need to be mindful of, like artwork or antiques. Most Americans, even very wealthy Americans, usually, in my experience, don’t really have a lot of value in the contents of the home, their value, or their other assets such as their brokerage accounts or investment properties.
Some clients have quite a bit of value, but we do a walkthrough and take a really good look at it and can determine that this is a lot of content that will be distributed to the beneficiaries. They’re more than likely not going to want it. So, it will be sold, auctioned, donated, and disposed of. But we will get an appraiser. If we think that there’s a lot of high value, then the appraiser will take each item to determine that value versus grouping things together. Because most, like I mentioned, most people have a limited amount of value in their content. Their furniture may have little value. It’s living room furniture, and then they put a number on it. We will show that to the beneficiary once we get the appraisal completed. We’ll show it to them, and we give everybody an opportunity to decide what they want, and then we can always equalize it afterward.
You’re going to bring in a professional who can say, walking through, can say, “These four items over here, they need to be appraised individually because I think those might have value. Everything else is just regular household stuff. And this is approximately what I see it all being worth together.” And then that’s what you’re going to present to your beneficiaries.
And we’ve done that, but sometimes they’ll do it by, like, Bedroom One, Bedroom Two, Living Room, Dining Room. But we also have had appraisers walk through and say, “This entire household furniture, the whole contents of the house are worth $2000.” Right. Or whatever. And then that’s what we present to the beneficiaries.
And then also, to add on a little bit to that, we have the responsibility again. Looking at the trust, what does it say? Is anybody getting anything specifically? Maybe a special base, anything. But if not, if the trust is silent, then we either do an estate sale ourselves or clear out the property. Or, we hire – you may need to do an auction – or we hire an auction service company to take care of the sale. So, we start thinking about how we are going to sell it. What’s the best way and highest we can get for this property?
Got it. And if the beneficiaries can agree that that’s fine, and anything you don’t manage to sell during that sale, do whatever you want, donate it – assuming the trust is silent. That’s probably where you’ve got to get some beneficiary agreement, or you would try to. The trustee has, in most cases, the discretion to do what’s in the best interest of the beneficiaries. Right.
If everything is supposed to be divided up amongst the number of beneficiaries – say there are three people – a third, a third, a third – we’ll show everybody the appraiser. And this is the method that we tend to use most. We give everybody the appraisal, and we tell them to circle what they want and then send it back to us. And almost never is there overlap. There might be one or two items, and I tell them upfront that I will be the final arbiter if there is an overlap. Then we pack ship, or they deliver. They may pick up the items if they’re local. Then we tell them the rest: we are going to be having an estate sale or an auction, depending on what makes the most sense, and then we’re going to be donating. In the end, what can’t be donated or recycled is disposed of. We lay it out in a letter and an email so they know. And, of course, they’re going to come back and ask questions. Sometimes, we may need to modify what we do, depending on some of their concerns, but usually, that’s the practice that we follow.
Yeah, that seems like a pretty good basic practice that could be applied anywhere in most situations.
I’m going to ask you – and it could be about real estate, it could be about the tangible personal property in the home – if you could come up with a wishlist for what you wish you could see in the trust document that would make jobs possible, just easier or clearer or make there be a little less hassle with the beneficiaries, what would you like to see? What do you like to see in documents?
Good question. Well. Oh, go ahead, Kathy.
I was going to say, I know it’s difficult in the trust document itself for the person to remember everything, who’s going to – this is going to go to this person. But if they can give a little bit more direction in the trust document, I would really like that. So, for example, if they stated in there, their trustees should have a meeting with beneficiaries to select items that they would like, and all other items are to be donated or sold. I guess just more direction in the trust document as to tangible personal property.
Okay. Fair enough.
I’m going to go back a bit further to what’s before the trust document. I am going to ask potential clients now to downsize. I am settling an estate right now for a woman who died at 96. Very sweet person. Wonderful family. I have never seen so much jewelry in my life. The jewelry she never wore, the jewelry she might have been able to have her grandchildren or her children – Exactly. And I mean, that’s fine. That’s our job. We’ve inventoried it. We’ve got an appraisal. We’ve sent it out to the beneficiaries. But, you know, there’s a cost to all that. So, if you’ve given that away, let’s say you’ve downsized and you’ve gotten rid of most of the stuff that you don’t even know what’s in the attic, but you’ve gotten rid of it, you’re making our jobs easier, and it’s actually less it’s less expensive. That’s going to save money for the beneficiary. So that’s pre-trust.
I like that. That’s a good point. We all should downsize. Yes, that’s very good.
Thank you both so much. Of course, it was very informative. My guests today were Karen Fisher and Kathy Rodriguez, licensed professional fiduciaries with Bishop Fiduciary Services. We enjoyed it. Thank you all for joining us today. We hope you learned a lot and had fun, and I look forward to connecting with you next time.
Get in Touch with Karen and Kathy!
Bishop Fiduciary Services, Ltd.
1399 Ygnacio Valley Road, Ste 25
Walnut Creek, CA 94598
(925) 954-7769
Karen Fisher, Founder: karen@bishopfiduciary.com
Katherine Rodriguez, Licensed Professional Fiduciary: katherine@bishopfiduciary.com
https://bishopfiduciary.com/
Resources Related to This Episode:
- Absolute Trust Talk Episode 141: Managing Real Estate Assets as a Trustee: https://absolutetrustcounsel.com/141-2/
- Absolute Trust Talk Episode 133: From Wheels to Waves: How to Fund Your Trust with Cars, Boats, or Mobile Home Assets: https://absolutetrustcounsel.com/133-from-wheels-to-waves-how-to-fund-your-trust-with-cars-boats-or-mobile-home-assets/
- A Will is Not Enough – Securing Your Legacy with Estate Planning Life can change in an instant. A will is not enough to be prepared. Get free access to our actionable E-book Guidebook #1 and start protecting your legacy today. https://absolutetrustcounsel.com/guidebooks/
- Learn how to comfortably define gray areas and assess your own unique needs to effortlessly build a secure future now. Check out Guidebook #2, Estate Planning Beyond the Basics, here > https://absolutetrustcounsel.com/guidebooks/
- Get our free introductory guide to the most used estate planning tool, family trusts, and understand how we plan to help protect your family. Guidebook #3: https://absolutetrustcounsel.com/guidebooks/
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